Insider information trading analysis of Defense companies prior to major contract awards

Abstract

The purpose of this thesis is to examine government contractor stock activity prior to contract award announcements to determine if insider information inequalities may have occurred. The stock price data of four defense companies for the 30 days prior to a contract award is analyzed. The Capital Asset Pricing Model was utilized to determine if abnormal returns were present. When abnormal returns are found, all available news related items were investigated to find possible explanations. Abnormal returns were not found in two of the four companies analyzed. The abnormal returns of the other two companies appeared correlated to a surprise positive earnings announcement and a strong sector rally rather than directly to the contract award. The contract award process within the defense industry appears to be effective in these cases with no apparent flaws within the information flow. The current regulations regarding trading based on insider information monitored by the Securities and Exchange Commission also appears to be effective